BUSINESS SUCCESSION PLAN MODEL

Appendix A
BUSINESS SUCCESSION PLAN MODEL
I. WHAT IS A BUSINESS SUCCESSION PLAN
A Business Succession Plan is a multidisciplinary process providing a
comprehensive and strategic approach to guiding the transition of business
ownership. It is to be a dynamic document that is utilized as a guide to
manage the issues of transition. When a succession plan is in place, it allows
the business owner to anticipate and effectively manage change.
A successful plan must be realistic and workable and not prepared in isolation.
It must involve family members, professional advisors, shareholders, partners,
strategic employees, and all stakeholders in the business.
Communication, during the preparation and upon completion, is a critical
component of the process. Unless all affected parties are clear about what is
in the Succession Plan and have had the opportunity to participate in its
preparation there will be problems.
The Plan will address the issues of “When and How” transition of the business
to new ownership and management will occur.
II. HOW TO USE THE BUSINESS SUCCESSION PLAN MODEL
The Business Succession Plan is to be used as a model or guide to lead the
user through the process of developing a Succession Plan for their business.
As each business and owner is unique, the Plan will also be unique. The
model is a tool that will be customized to the personal needs of the user.
Use of the Model will assist the business owner in the preparation and
gathering of information necessary to make informed decisions regarding the
future of the business. It should not be viewed as being a replacement for
using professional advisors. The implications regarding legal, financial and
taxation issues are too great and intricate to be made without professional
input.
III. WHY PREPARE A BUSINESS SUCCESSION PLAN?
A Business Succession Plan is an important component of any business’
strategic planning process. It will aid the business owner in preparing for the
time when they will retire from the business or in more extreme times, of
illness or death. With a Succession Plan in place, the business will be more
likely to survive through transition of ownership and will maximize the return
to the retiring owner’s investment.
By not preparing a Succession Plan, business owners risk monetary loss
through ineffective tax and financial planning at the time of succession. In
many instances the future of the business may also be put in jeopardy.
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Transition to new ownership, whether within the family or to outsiders, is
always a risky proposition, however, through effective planning the risks can
be reduced and contingencies put in place.
IV. COMPONENTS OF THE BUSINESS SUCCESSION PLAN
Each Business Succession Plan will be unique as each business and personal
situation is unique. The components of the Plan, which are outlined below,
provide a guideline to be followed, however, not every section will be required
by every business and may be modified to meet personal needs.
A. ESTABLISH GOALS AND OBJECTIVES
This section of the plan is where the owner’s personal goals and vision
for the business and his/her future role in its operation will be
addressed. The establishment of clear goals and objectives provides a
base on which the succession planning process will develop. If the
owner is not sure of where he wants to go with the business it will be
ineffective and lead to problems in the future.
Items to be included:
a. Owner retirement goals
- How you plan to spend your retirement
- How much income you will require to
live the life you desire
- Do you plan to stay active in the
business
- Do you plan to become involved in
another business
- Do you have hobbies or other outside
interests to keep you active
b. Family member goals
- Who from the family plan to stay
involved in the business
- How would selling or transferring
ownership impact other members of
the family (spouse, children)
c. Goals of other stakeholders (partners,
shareholders, employees, etc.)
- Will partners or shareholders buy you
out
- Does your leaving the business leave a
gap in the operations of the business
- Will key employees continue under the
new ownership
d. Goals relating to what is to happen in case of
illness or death of the business owner
- Provisions for how the business is to
carry on if the owner is incapacitated
or dies
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B. FAMILY INVOLVEMENT IN DECISION MAKING PROCESS
This section is important in that by having the family and all
stakeholders involved in the decision-making process, or at least kept
informed of the decisions being made, will alleviate many of the
problems that arise relating to inheritance, management and ultimately
ownership issues.
Issues to be addressed:
a. Communication
- Establish a formal process through
which information is exchanged
between family members relating to
the business
- Communication is critical, all affected
members of the family must be
provided with the opportunity to
express their ideas and opinions
b. Process for handling family change and disputes
- Establish a process for dealing with
disputes and changes to the family
structure which could impact the
business such as divorce, death, injury
- May require the involvement of outside
advisors such as a lawyer and/or
accountant
c. Family vision for the business
- A collective vision of what the
business is and how it is to operate is
necessary if the business is to pass
from one generation to the next
successfully
d. Relationship between family and business
- There is a need to be able to separate
family and business. Although closely
related, it is imperative to be able to
objectively make business decisions
separate from family decisions.
C. IDENTIFY SUCCESSOR (S)
In this section you will address the issue of who will take over both
ownership and management of the business. It must be recognized that
these two issues are not the same. This process must not be taken
lightly and will require a great deal of preparation and planning.
a. Identification of potential successor(s)
- It is a difficult process when
determining who will take over the
business, be it ownership or
management. Each potential candidate
has to be assessed individually as to
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suitability, acceptability, commitment,
dedication and determination.
b. Training of successor(s)
- Once a successor has been selected it is
necessary to assess their skills and
abilities to determine areas in which
training will be required
- Establish a training plan to bring the
successor’s skills up to the desired
level
c. Building support for successors
- With other family members
- With employees
- With customers
- With suppliers
d. Teaching successor to build vision for the
business
- Your vision is what has driven the
business, under new ownership or
management the direction may change
and the new owner/manager will need
to be able to clearly express the vision
to employees, shareholders, partners,
customers and suppliers.
D. ESTATE PLANNING
This section of the Plan is exceedingly important, especially if the
business owner is planning to retire or is taking a precautionary
approach to the future of the business in preparation for being unable
to continue operation of the business due to illness or death. Proper
estate planning will significantly impact the financial future of the
business owner, the business itself and all those with a financial stake
in the business (family members, partners, shareholders and
employees).
Estate Planning is where outside advisors are necessary to ensure that
all necessary issues are properly addressed to maximize benefits to the
business owner. Advisors to be consulted include: lawyer, accountant,
financial/estate planner and life insurance representative. Each advisor
will have their own area of expertise and will be able to provide
necessary pieces of the puzzle.
Issues to be addressed in this section include:
a. Taxation
- Planning for the sale, or transition of
ownership of a business can have a
tremendous impact in the future of the
business. When exiting or transferring
ownership of a business, there are
potential tax risks and benefits that
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only an expert in this field can properly
identify. Each business and family
situation is unique and must be
addressed specifically for that
situation.
b. Retirement income
- Planning for how much money is going
to be needed in retirement and where it
is going to come from.
- Based on the owner’s retirement goals
identified in Section IV. A, lifestyle
issues will help to determine retirement
income levels required to maintain the
desired lifestyle during retirement.
- Develop an outline as to how money
will be saved to ensure a financially
secure retirement.
- Should be done earlier rather than later.
The earlier a plan is in place, the easier
it will be to make the necessary
preparations to ensure that sufficient
funds are available at the time of
retirement.
c. Provision for other family members
- Develop estate and personal financial
plans for the business owner and
spouse as well as the succeeding
generation. This will help to reduce
the potential for financial problems to
be encountered at the time of
transition.
- By addressing the issue of providing
for family members in the Succession
Plan it will clarify the owner’s wishes
while all family members can express
their concerns.
d. Active and non-active family members
- The issue of providing fairly and
equitably between active and non-
active family members is often one that
creates family disharmony. Fair and
equitable are not necessarily
synonymous terms and must be
addressed in any estate plan.
- This issue needs to be discussed and
concerns addressed before being
finalized to reduce the potential for
conflict at a later date.
e. Other financial considerations
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- Address any issues relating to financial
implications impacted by the transfer of
ownership of the business. Unforeseen
financial implications can have very
negative impacts to the future value of
the business, the financial stability of the
retiring owner and the salability of the
business.
E. CONTINGENCY PLANNING
As plans rarely proceed smoothly or as desired, it is important to
consider what could go wrong or awry and prepare alternatives on how
to address situations as they occur. It will not be possible to anticipate
every situation that may occur, but you can anticipate the more likely
scenarios and prepare for them.
A good approach for this section is to look at “what if” scenarios and
have a strategy outlined to deal with the situation if it arises. This need
not be highly detailed but should be looked as being a guide if
unforeseen circumstances occur, such as illness or death of the
principal or key person in the business.
A simple strategy may be to prepare a list of possible situations that
could occur and from there identify what you would expect to do, or
have done. By using this method, it will cause you to look for
solutions in advance rather than having to react at a time of stress or
duress.
F. CORPORATE STRUCTURE AND TRANSFER METHODS
In preparing for business succession it is necessary to review and
update the organizational and/or structural plan for the business. In
many small businesses, the owner is the sole person responsible for all
aspects of the operations. As this person plans to remove himself or at
least reduce the active role they play, it may be necessary to
differentiate between ownership and management responsibilities and
create positions for these roles.
The goals previously established, followed by the choice of
successor(s) will factor into how the business should be structured to
the benefit of the owner and the business itself. Just because it worked
in the past, the strengths and weaknesses of the successor need to be
considered and a structure be established to take full advantage of
strengths and compensate for weaknesses.
Issues to be addressed in structuring the business for transition include:
a. Identify roles and responsibilities
- As you prepare for retirement or
selling of the business it is necessary to
ensure that current family members
and employees have clearly defined
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roles and responsibilities to aid in the
smooth transition to new ownership
and management.
b. Fill key positions
- Ensure that key management and
specialized positions are filled making
the business more attractive and
prepared for transition. A business
with a strong management and
workforce is more attractive to
potential buyers.
c. Structure the organization based on who is to be
the successor
- Look at the strengths and weaknesses
of those to take over and build a
structure to take advantages of
strengths and compensate for personal
weaknesses.
- Establish roles for family members (if
applicable).
- Separate ownership and management
roles if necessary.
d. Take into consideration any potential roles for
the retiring owner
- Advisor
- Consultant
- Chairman of Board of Directors
e. Restructuring may be required as the original
owner often fills multiple roles that may need to
become separated due to skills, knowledge
and/or experience.
There are a many methods that can be utilized to transfer ownership of a business
either to family members, partners, employees or outside buyers. Each business is
unique and must be addressed based on present circumstances. This is best addressed
by bringing in professionals to aid in reviewing the alternatives and selecting the
method best suited to your needs.
f. Lawyer
- To examine the legal implications and
how to minimize potential conflicts
between buyer and seller as well as
looking after the interests of family
members.
g. Accountant
- Will assist you in looking at the
financial issues aiding in making the
transition with as few financial
implications as possible.
h. Financier
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- Will be able to provide information to
you as the seller, which will allow you
to make improvements or changes
designed to make the financing of the
business more attractive to potential
buyers.
G. BUSINESS VALUATION
It is important that in preparation for succession of a business that steps
are taken to enhance the value of the business in order to make it more
attractive to potential buyers while maximizing tax benefits to the
current owner.
There are various types of valuation methods used by accountants,
realtors and business brokers. It is best to review the options with
these professionals in order to select the method best suited to your
circumstance.
Some of the factors that impact the value of the business are:
a. What is to be sold?
- Are the assets of the business or
shares to be sold?
b. Where is the business located?
- A business located in a small market
may not have the resale value of one
in a larger market
c. Profitability
- Consideration must be given to the
current profit margins and if there is
potential for growth. A business that
is mature and has limited growth
potential is not as valuable.
d. Financing
- The ability of potential buyers to
obtain financing will impact the
actual value of the business. Lenders
look at value of a business differently
than an accountant will, take this into
consideration when establishing a
sale price as it may provide a more
realistic view as to what you can
expect to get out of the sale.
e. Inventory
- The value of the inventory to be
included in the sale of the business
may form a significant percentage of
the overall value of the business.
The difficulty arises in placing a
value on the inventory that is
acceptable to the seller, the buyer and
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most importantly to potential
financiers. Often financing of
inventory is limited or non-existent.
H. EXIT STRATEGY
In this section of the Succession Plan, you will address issues specific
to the actual transition of ownership and removing yourself from the
day-to-day operations of the business. It involves the comparison of
alternatives and a framework for how to make your final choices.
a. Transfer method
- Selection of the actual method of
transfer to be implemented, be it family
transfer or sale, sale to a third party or
possibly the liquidation of the business
are examples.
b. Establish timelines
- Identifying a schedule for the
implementation of the components of
the Plan. Without a schedule it will be
difficult to meet your goals and
objectives.
- Make sure that timelines are reasonable
and achievable.
c. The Exit Plan needs to published and distributed
to all persons participating in the succession
process.
- Provides an opportunity for
clarification of roles and
responsibilities.
- Provides an opportunity for those
affected to raise issues and concerns
and bring resolution to those issues
prior to implementation of the
Succession Plan.
- Aids in ensuring that owner’s wishes
are adhered to in case of illness or
death.
I. IMPLEMENTATION AND FOLLOW-UP
It will be necessary to review your Succession Plan from time to time.
A well-prepared Plan will be done early and will require updating and
revision as situations change. As with any strategic planning
document it must be dynamic and flexible.
An effective means of ensuring that you take the time to keep your
Plan current is to schedule a regular review process. As a suggestion,
set aside a specific period each year to examine the Succession Plan
and assess its applicability and address any changes that may impact
your ability to implement the Plan as required.
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V. CONCLUSION
At this stage of the planning process you will be taking a final objective look
at all aspects of your Succession Plan and determining your readiness and in
many circumstances your willingness to proceed with succession. It is here
where you may wish to identify some of the criteria you will utilize in making
the final decision to start the process of implementing your decision to transfer
ownership of your business.
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